An investor who wants to estimate the enterprise value multiple (EV/EBITDA) of a company has gathered the following data:
| Market value of debt | $10 million |
| Market capitalization | $45 million |
| Cash and short-term investments | $2.5 million |
| EBITDA | $15 million |
| Firm's marginal tax rate | 40% |
The company's EV/EBITDA multiple is closest to:
B is correct. Enterprise value (EV) = Market capitalization + MV of debt + MV of preferred stock - Cash and short-term investments.
EV = 45 + 10- 2.5 = 52.5; EV/EBITDA = 52.5/15 = 3.5